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7/28/2019 Accenture Banking Retail Lending
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Retail lending origination excellenceKey capabilities for enabling sustained and profitable growth in
Asia Pacific
Banking
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1
Contents
Introduction ..................................................................................................................................... 2
Strong prospects for growth in Asia Pacific lending .................................................................... 3
Growth in retail lending is driven by
consumer demand and government policy
Headwinds in the Asian retail lending market ............................................................................... 5
Rising expectations and growing appetite for risk from customers
Increasing regulatory pressures
Intense market competition and restrained profitability
Challenges to retail lending growth ............................................................................................... 7
Capabilities required to achieve retail lending origination excellence .......................................... 8
Empower people
Establish lean and automated processes
Build in flexible technologies
Conclusion ........................................................................................................................................ 12
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2
Across Asia, consumer demand for
credit cards, unsecured loans andmortgages has increased substantiallyin recent years. With positivedemographic changes and favorableeconomic conditions, it is expectedthis growth will continue at pace.
However, while banks are takingadvantage of these trends, theyface a number of challenges:greater competition; an increasinglysophisticated customer base;regulatory demands. These are making
the achievement of lending portfoliogrowth, in a timely and profitablemanner, extraordinarily challenging.The evidence for this is illustrated indeclining interest margins, particularlyfor banks operating in Advanced Asiamarket. The need for focus by bankson retail lending origination excellenceis not simply an option; its a necessityif banks are to close the gap betweengrowth aspirations and executionreadiness.
To achieve retail lending originationexcellence, banks need to developand refine a number of capabilitiesacross the value chain, therebyfostering revenue growth, cost
reduction, higher credit quality
and, ultimately, profitability.
However, one size does not f it all.Due to differences in the maturitylevels of the various Asian bankingmarkets, each country faces differentchallenges. We believe the capabilitiesthat banks need to create orrecalibrate will vary depending on thematurity of markets they operate in, orplan to enter in the future.
Based on our analysis of market
maturity we have segmented Asiainto three groups and recommendeach group focuses on a core set ofcapabilities to achieve retail lendingorigination excellence in the short tomedium term.
Advanced Asia (Australia, HongKong, Japan, Singapore) - it willbe critical to focus on end-to-end process automation usingintegrated technology platforms;standardization of processes
via cross-product regionalfactories; investment in advancedsegmentation, and analyticsto support greater sales forceeffectiveness.
Maturing Asia (Malaysia, South
Korea, Taiwan, Thailand) it willbe critical to focus on creating acustomer origination mindset;empowering a skilled salesworkforce; simplifying legacybusiness processes; introducingautomated credit decision-making,and improving credit monitoring toenhance end-to-end profitability.
Emerging Asia (China, India,Indonesia, Philippines) it willbe critical to increase process
control; develop simple sales toolsand educate the sales force aboutproduct complexity and pricing; andimprove credit risk management inorder to achieve rapid and scalablegrowth.
Banks looking to expand beyond theirdomestic borders need first to ensurethey address the requirements oftheir home markets. Addressing theirdomestic challenges first will providethem with a platform - based on a
high degree of standardization andoperational discipline for geographicexpansion across Asia, not only atspeed, but also with the prospect ofhigher profitability.
Introduction
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3
Retail lending1 growth is particularly
evident in Emerging Asia and inselected other markets across Asia (ieThailand, Singapore). Most notably,demand for retail lending is growingfaster in comparison with othertypes of lending in Asia (Figure 1).
Growth in retail lending isdriven by consumer demandand government policy
Markets in Asia show significantdifferences in lending growth trends
across the product portfolio. Forexample, mortgage lending is a keyfocus for banks in Advanced Asiadue to the influx of professionalmigrants, increases in the proportionof young, first-home buyers, and therise in foreign purchases. In addition,investors in these markets are moreinclined to focus on the perceived lowrisk nature of property.
Lending growth in Emerging Asia isexpected to be the fastest, driven bystrong domestic demand, a growingmiddle class and government policydesigned to boost credit availability.
For example, government investment
in telecommunications has improvedthe take up of mobile banking in ruralpopulations, particularly in India andIndonesia, where large customer basesare being served with simple retaillending products.
In Advanced Asia, increasing consumersophistication (demonstrated bythe rise in foreign purchases andinvestment in the property market) isdriving growth in retail lending, withboth unsecured debt and mortgage
debt growing at an exceptional rate in2010 (Figure 2).
In contrast, banks in Maturing Asiatend to have a more balanced retaillending portfolio, with greateremphasis on non-mortgage products(eg personal loans, auto loans). Themain challenge for banks in MaturingAsia is declining demand for creditcards (Figure 2). The reasons forthis vary from country to country,but include stricter eligibility
requirements in Malaysia, andincreased competition in Taiwan.
Finally, mortgage and other lending
products (ie personal loans, auto loansand other consumer loans) represent agreater share of the lending businessin some Emerging Asia countries(Figure 2).
For example, the Philippines risingaverage incomes and levels ofeducation have given rise to stronggrowth in the credit card business.However, the rate of consumer creditdefaults in the Philippines is almosttriple the average in Asia2, so borrower
quality remains a key issue.
Strong prospects for growth inAsia Pacific lending
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9.3%
14.4%
18.5%
1.7%
10.9%
8.4%
11.0%
2.5%
18.7%
10.2%
16.2%
41.7%
14.4%
37.6%
27.5%
22.9%
14.7%
-1.8%
10.1%
4.2%
19.7%
6.8%
11.8%10.6%
22.2% 22.8%19.6%
21.5%
-10%
0%
10%
20%
30%
40%
50%
Australia
Hong Kong
Singapore
Japan
Advanced
AsiaKorea
Malaysia
Taiwan
Thailand
Maturing
Asia
India
Indonesia
Philippines
China
Emerging
Asia
2010 Retail Lending Growth (%) 2010 Total Lending Growth (%)
4.6%
70.4%74.2%
45.6%
50.7%
74.3%
54.4%
50.9%
39.9%
3.9%
7.9% 4.5%
5.8%6.8%
2.6%
25.5%
9.3%21.8% 21.3%
48.6%
42.4%23.1%
45.6% 46.3%34.7%
-10%
0%
10%
20%
30%
40%
50%
-20%
20%
60%
100%
Australia Hong Kong S ingapore Korea Malaysia Taiwan Thailand India Philippines
2.8%86.8%
Mortgage Credit Card Others Growth of credit card receivables (%)
Growth of credit card receivables (%)
Growth of mortgage credit (%)
Growth of mortgage credit (%)
4
Figure 2: Key components of retail lending and growth in mortgage and credit cards, 20104
Figure 1: Growth in retail lending (%) vs. total lending in Asia, 2009 -20103
Source: Asian Central Banks
Source: Asian Central Banks
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5
While there is very strong demand
for retail lending products in Asia,other market forces will continueto challenge the momentum ofgrowth. These diverse forces acrosseach banking market will requiredistinct responses. What is certainis that an increasingly complexenvironment is making it morechallenging for banks to grow lendingrevenues and sustain profitability.
Rising expectations andgrowing appetite for risk fromcustomers
Asias banking markets are maturingalongside evolving customerexpectations and appetite for risk.The burgeoning Asian middle classis driving demand for new, moresophisticated financial products andservices. In Asia, the middle class isestimated to more than triple in sizefrom 525 million in 2009 to 1.7 billionby 2020. In less than ten years, Asia
could be home to more than half ofthe worlds middle class population.5
Nearly one-third (31%) of Asianmass affluent customers intend toincrease their overall level of risk
by borrowing more (Figure 3). This
is especially true in Maturing Asiawhere 39% of this group intendto increase their borrowing.
Changing customer demand isdriving banks to introduce innovativeproducts, launch them faster andimprove service levels to meetcustomer expectations. Banks willalso need to ensure they continuouslyupdate their understanding ofcustomers changing risk appetites,and develop their products and
services accordingly.
Increasing regulatory pressures
As governments focus on maintainingthe strength of their financial marketsamid continuing global turmoil, riskhas become a key consideration.Consequently, banks are being forcedto conserve capital through slowerloan growth, lower dividends andequity injections. This means thatretail lending origination excellence
will be critical not only for strongerrevenue growth, but also for achievinghigher credit quality and more prudentrisk management.
Intense market competition and
restrained profitabilityBanks in Asia already face challengesin deriving revenue from interestincome sources (Figure 4), as wellas maintaining strong net interestmargins. This is primarily due to alow-interest rate environment andintense market competition, mostevident in Advanced and MaturingAsia. This challenge is compoundedby inefficiencies in the credit systemsthat further test banks abilities to
fully capture existing lending demand.Overall, profitability remains belowpre-financial crisis levels, and recoveryis slow across most markets in Asia.
With these market forces in play, theability to rapidly and cost effectivelysupport retail lending growth isbecoming increasingly challenging forbanks in Asia (Figure 5).
Headwinds in the Asian retail lending market
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31%
52%
17%
Total Asia
Increase Stay the same Decrease
23%
61%
16%
Emerging Asia
39%
38%
23%
Maturing Asia Advanced Asia
30%
58%
12%
-5%
5%
15%
Pre-tax
ROE
Percentage
25%
35%
45%
2007
Year
2008 2009 2010
Advanced Asia Average Maturing Asia Average
Emerging Asia Average Asia Pacific Average
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
40%
50%
60%
70%
80%
90%
2007 2008 2009 2010
Contributionof InterestIncome toRevenue (%)
Year
Net InterestMargin (%)
Advanced Asia Maturing Asia Emerging Asia
Contribution of net interest to revenue Net interest margin
6
Figure 3: Change in future borrowing risk appetite: Mass Affluent Customers
Source: Accenture Asian Banking Customer Survey, 2009
Figure 5: Evolution of return of equity (Pre-tax ROE)7
Source: Accenture Analysis, 2011
Figure 4: Interest revenue: Contribution to total revenue and margins6
Source: Accenture Analysis, 2011
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Product
Management
Continuing
margin
pressures
Product
rationalization
Blurring of
definition of
consumer versus
businesscustomers
Speed to market
with new
products
Rising customer
attrition
Sales
Low sales per
FTE ratio and
low cross sales
ratio
Misalignment of
rewards to
strategic sales
objectives
Poor productknowledge
High training
costs per sales
person
Ineffective
recruitment
process
Origination
High levels of
manual processing
Excessive re-work
and manual
document
handling by bank
and 3rd parties
Inconsistent
credit decisioningand slow
turnaround
Servicing and
Monitoring
Multiple
servicing centres
are performing
duplicate
functions
Significant
overcapacity
in service
environments
Collections and
Recoveries
Inconsistent
productivity in
collection areas
Collection
strategies are not
targeted at high
risk customers
Multiple systems
are inhibitingcapabilities
around
customer-based
collections
Alliance
management and
arrangements
creating
inefficiencies
Credit Risk
Management
No consistent
view of
customers
Excessive
override of
credit policy
resulting in
sub-optimal
lending Lack of decision
tools and
technology
integration
Inconsistent
automated
scoring or
decisioning
7
To secure rapid and profitable growthin retail lending, Asian banks needto address a number of challenges:
Differentiation: A lack of focus on
customer acquisition and productand service innovation is making itincreasingly difficult for banks tomeet evolving customer demandsand grow revenue per customer.
Pace: Origination processes tend tobe slow for the customer this inturn reduces the sales forces abilityto close in a timely manner. Sloworigination processes cause highcustomer attrition and makes it hardto acquire new customers.
Scale: Banks lack scalable platformsto facilitate future growth.Inadequate technology platformsmean banks cannot achievesignificant cost efficiencies andrealize optimum economies of scale.In addition, disparate and agingsystems are expensive to maintain,
are difficult to operate competitivelyand limit regional expansion.
Regulation: Banks often do not haveinfrastructure that is compliant with
new regulatory requirements. Banksability to capture optimum revenueshare is under pressure due to thedouble hit of a higher cost of capitaland restrictions on leverage.
Across the retail lending value chain(Figure 6), banks are suffering fromreducing margins, low cross-sell ratios,high costs as a result of inefficiencyand poor credit quality.
Challenges to retail lending growth
Figure 6: Retail lending value chain: Common challenges in Asia
Source: Accenture Analysis
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8
Capabilities required to achieve retail lendingorigination excellence
To address the challenges they faceand to capture the opportunities
presented by growing consumerdemand, banks in Asia need to developretail lending origination capabilitiesin three key areas: first, they needto empower their people with newtools and methods to transformtheir retail lending originationand decision-making capabilities;second, they need to establish leanand automated processes acrosstheir lending operations; and third,they need to develop flexible andagile technology platforms.
1. Empower people
Banks need to improve the way
they target and attract profitablecustomers. The key condition is a clearseparation of customer originationfrom product origination. This can beachieved by:
Creating a customer-originationmindset.
Building an accountable and skilledsales and servicing workforce.
Creating a customer-originationmindset
Banks can significantly improvecustomer acquisition and retentionif the sales and servicing workforceunderstands the profiles of customersegments, and has access to a 360degree view of customers, with realtime customer information updates.
Enabling a single view of the customerwill also facilitate more effective
cross-selling.Once customer segments are welldefined and understood, products orproduct bundles need to be developedand targeted at the specific needs ofeach segment. Risk-based pricing andapplication of discounts for goodlending customers is another pointof differentiation that will enable thesales force to improve retention ratesof customers based on their specificneeds and value.
Finally, to empower the sales force toachieve a credit decision for customersat the point of sale, banks need toreduce the manual input requiredto make credit decisions and useautomated decision-making rules.
Case StudyFacing the prospect ofincreased competitive andmargin pressures, one of theUK's largest mortgage lenders,and a leading player in savingsand insurance products,partnered with Accentureto radically overhaul theirmortgage application processacross multiple channels.
The mortgage business wasmanaged as discrete businesses,had duplicate capabilities,systems and locations, andsuffered from increasingcomplexity. This resultedin high levels of manualorigination and interventionacross pre-and post-completionprocessing. In addition, existing
systems and processes did notsupport future requirementsand growth.
A combined package / custom
solution was implemented, whichfundamentally changed the waymortgages were sold by:
Re-engineering the processfrom initial quotation tocompletion of the sale to cutinterview times.
Delivery of a single systemfor use across the multiplechannels (branch, call centre,
third party originators, estateagents) with functionality tosupport the new process.
Integrating an online frontend, built around theMicrosoft toolset.
The investment in the end-to end lending originationprogram met market demand
and achieved significant costreductions. Overall the bankimproved its cross-sell ratioby 10%, increased customer
satisfaction from 40% to 85%
and drove a 30% reduction inprocessing times.
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9
Building an accountable and skilledsales and servicing workforce
Increased customer centricityrequires better data quality, not onlyto improve customer insight andengagement, but also to enhancegeneration of quality leads. Strong
sales management throughout the lifeof an opportunity is essential to ensurehigh conversion from lead to deal. Forexample, sales workforce should beable to conduct needs analysis andutilize demonstration tools during theorigination process, as well as haveend-to-end case ownership and dealstatus from all channels throughoutthe opportunity lifecycle.
To enable sales representatives to takeaccountability for customer needs
throughout the entire lifecycle, banksalso need to focus on tying targetsand remuneration mechanisms to salesforce performance.
Empowering people with new toolsand methods that can improvedecision-making closer to thecustomer will require banks to investin developing end-to-end originationcapabilities.
2. Establish lean and
automated processes
Improving the efficiency of the end-to-end origination process is achieved by:
Simplifying business rules andparameters.
Automating end-to-end processes.
Re-engineering business processesand creating operations factories.
Simplifying business rules and
parametersBanks can achieve significantimprovements in their retail lendingorigination processes by: reducingcustomer data requirements (includingsignatures); enabling customersto provide information only once;eliminating legacy and redundant
credit rules; reducing customer andinternal document requirements;shortening verification and qualitycheck overlaps, among other measures.
Automating end-to-endprocesses
A number of key capabilities havebecome standard in high performanceretail lenders, including:
Pre-population and data validationto reduce errors.
Automated application of businessand credit rules to produce highlevels of decisioning at the point ofsale (ie pre-approved limits).
Automation of key internal (egaccount history) and external
interfaces (eg valuers). Significant automation of end to
end workflows (ie early warningsystems and automatic notificationof upcoming and overdue reviews).
Automation of all customerdocuments point of sale.
A global bank sought totransform its mortgagemodel and implement a neworigination platform integratedwith existing bank core systemsto better respond to marketcompetition.
The banks mortgage businesswas facing aggressive
competition and continuingpressure on interest margins.The credit challenges it facedincluded highly manualprocesses, complex technologyacross its credit divisions anddiverse focus on credit by eachbusiness unit.
The bank invested in a newloan origination solution whichintegrated with its CRM,credit decisioning, and severalother existing bank / externalsystems.
Following the completion ofthe full rollout of the system,the bank hopes to increase
automated credit scoring fromaround 60% to 85-90% ofmortgage applications, reduceprocess handoffs from up to 12to 1-4 for a simple application,increase sales and reduce costsacross the business.
Case Study
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Retail
Origination
Product& Pricing
Docs. &Fulfilment Servicing Collections RecoveriesSegments
Business
Product/Channels
Mortgage-Broker
Personal Loan-Direct
Personal Loan-Branch
Mortgage-Brand A
Mortgage-Direct
Revolving
Flexible
Term
Revolving
Trade
SpecialisedC
orporate
CreditAssessment
Retail
Mortgage Shared Service
SmallBusiness
Corporate Origination
ServicingSharedService
Specialised Lending
RecoveriesShared
Service
Corporate Collectionsand RecoveriesShared Service
Nonmortgagecollections
Origination andFulfilment SharedService
CorporateServicing
Commercial Mortgage
Retail
SmallBusiness
Retail
SmallBusiness
Country/Geography 1
Country/Geography 2
Country/Geography 3
Country/Geography 4
10
Implementation of collateralmanagement technology thatsupports complex cross-collateraldeals and maintenance.
Automated account setup,E-conveyancing and othersettlement tasks.
Re-engineering businessprocesses and creatingoperations factories
For banks targeting geographicexpansion, it is critical that they firstsimplify and automate their retaillending origination processes in theircountry of origin, or markets wherethey have a strong presence, beforestandardizing across the region.Creation of standardized credit
origination and fulfillment factoriesacross products and business lines willstrengthen banks' ability to executetheir regional growth strategies in Asia(Figure 7).
The key implications associated withthe creation of credit origination andfulfillment factories include:
The ability to create regionalcapabilities needs to be basedon an assessment of the level ofstandardization permitted by local
policy, regulation and products. Leveraging common capabilities
across the different parts of thelending business (retail, business,corporate).
Banks that invest in these capabilitieswill successfully realize economies ofscale while pursuing expansion acrossAsian banking markets.
Figure 7: Example loan factory: Originations and fulfillment
Source: Accenture Analysis
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11
A multi-national Europeanbank wished to develop afuture state strategy for theircommercial lending processesand technology across allproducts or segments.
The bank faced significantbusiness challenges within theircommercial lending origination,
fulfillment, and servicingspace, including processing andmaintenance inefficiencies;regulatory pressure regardingconsistency of data captureand data reporting challengesdue to the fragmentation oftheir systems.
The bank adopted a numberof processes and tools to
overcome these challengesincluding adjusting their coreplatforms to enable futureorganic or M&A growth;
implementing Straight-through-processing (STP)and multiple loan paths;incorporating integrated toolsand processes to support thelending lifecycle, and theadoption of improved datalineage.
The program resulted in a
reduction of re-keys andcycle time along with 40+%reductions in legacy tools,and an expected return oninvestment of $30M.
Case Study
3. Build in flexible technologies
To achieve and maintain the levels ofprocess automation implied above,banks need to invest in enterprisetechnology platforms that are scalableand component-driven. This isachievable by:
Adopting SOA enabled applicationsthat can easily be integrated withlegacy systems and third parties, andthat reuse common functionalityacross lending products.
Introducing parameterized systemsthat can be maintained by thebusiness user population (ie usercontrol of credit policy and otherbusiness rules).
Introducing virtualized infrastructureand componentized architecture(ie to support multi-channelarchitectures that improve theability to create different offers bychannel).
Investing in scalable and component-
based enterprise technology platformsenables banks to reduce costs, improvescale and enhance credit quality.
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Selected Credit &Lending Metrics
PoorPerformers
AveragePerformers
GoodPerformers
Category Description
Origination Rework Rates 20% - 50% 10% - 20% 5% - 10%
Average LendingTurnaround (Days)*
20 - 30+ 5 - 20 1 - 10
Average Doc PreparationTimes (Mins)*
50+ 30 - 50 5 - 30
Customer Touch Points inOrigination (#)
8+ 4 - 8 1 - 4
Data Capture (Mins)* 60+ 45-60 40-45
Auto Decisioning %
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1 Retail lending constitutes creditrelated to credit cards, personalloans, auto loans, mortgage loans etc.Total lending includes non-consumercredit. Data for India is as of the 2011financial reporting period.
2 Source: Credit card usage in thePhilippines, Technograph, May 2011.
3 Data for India is as of the 2011
financial reporting period. Datais not available for total loans inPhilippines. Components vary subjectto availability of data per country.
4 Data on loan breakdown by categoryis not available for Japan, Indonesiaand China. Others include personalloans, auto loans and other consumerloans. Credit card data is not availablefor Japan, Thailand, Indonesia, andChina.
5 Source: OECD, The Emerging MiddleClass in Developing Countries, January2010.
6 Based values in US$, derived fromsample of 78 banks in Asia. NetInterest Margin is calculated as NetInterest income divided by earningassets.
7 Based values in US$, derived from
sample of 78 banks in Asia. Pre-TaxROE is calculated as Profit Before Tax(PBT) divided by Shareholders Equity.
References
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Copyright 2011 AccentureAll rights reserved.
Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.
Accenture Credit Services
Accenture Credit Services offersconsulting, process reengineering,systems integration and businessprocess outsourcing services forresidential mortgage, commerciallending, leasing and automotivefinance lenders looking to transformand industrialize their operations.The services are designed to deliversignificant customer service,efficiency, and quality improvementsto our clients lending business.
For further information on AccentureCredit Services, or any materialincluded in this point of view,please contact Andrew Pitcher [email protected]
About Accenture
Accenture is a global managementconsulting, technology servicesand outsourcing company, withmore than 223,000 people servingclients in more than 120 countries.Combining unparalleled experience,comprehensive capabilities across allindustries and business functions,and extensive research on the worldsmost successful companies, Accenturecollaborates with clients to help thembecome high-performance businesses
and governments. The companygenerated net revenues of US$21.6billion for the fiscal year endedAug. 31, 2010. Its home page iswww.accenture.com.
About the Authors
Andrew Pitcher
Andrew Pitcher is a Senior Executiveand Managing Director of AccenturesAsia Pacific Banking Industry program.Andrew has over 19 years experienceacross all aspects of financial services,from consumer and commercialbanking through to program delivery,technology line management andtransformation. Andrew commencedhis career as a line banker, and hasfunctional experience in across CRM,lending, loan servicing and collections.
David Levi
David Levi is a Senior Manager inAccentures Financial Services Strategypractice based in Singapore. David hasworked with banks in over 10 differentcountries (last 3 years in Malaysia,Indonesia and Singapore) andspecializes in working with corporateexecutives to develop and design newinnovative customer centric and creditlending visions, operating models andtransformation programs. As ProgramManager for major banks, he has alsohelped many global banks implementand realize their credit visions in orderto become high performance banks.
Manisha Sahni
Manisha Sahni is a Manager in theAccenture Management ConsultingInnovation Centre, where she has ledseveral thought leadership initiativesprimarily for the Banking industry. Shehas diverse range of experience acrossFinancial Services, Telecom and Oil &Gas Industries in Asia & the MiddleEast. Her management consulting andindustry experience spans across theareas of Strategy Planning, InvestmentManagement, and M&A. She is basedin Singapore.